The Reserve Bank of India's recent decision to mark up the short-term interest rates, the repo rates, might appear sudden, but is entirely consistent with its recent monetary policy stance. The annual credit policy statement of April 18 had accorded primacy to inflation control even though it stayed clear of any overt interest rate signals. Both the reverse repo rate and the repo rate have been raised by 0.25 percentage points. The former, now at 5.75 per cent, is the rate at which central bank accepts funds from banks and the rate at which it lends the repo rate is at 6.75 per cent. These short-term rates have emerged as the main signals for interest rate changes in a largely decontrolled and globalised environment. Elsewhere in the world too, the more traditional monetary instruments, such as the bank rate, have fallen into disuse. The argument that the RBI could have waited until July, when its quarterly review of the monetary policy is due, to announce the hikes is fallacious for at least two reasons. The RBI has, on many occasions in the past, kept interest rate signals and other sensitive changes outside the purview of policy pronouncements. Second, there is enough evidence both from within India and abroad that inflation is on the resurgence. While the main trigger this time might have been the recent hike in the retail prices of transportation fuels and the need to promptly strike at inflationary expectations, there can be no doubt at all that the global economy has been on an upward interest rate cycle recently. Central banks from the developed world including the Federal Reserve, the European Central Bank, the Bank of Japan and quite a few from the emerging markets have either put up their benchmark interest rates or are in the process of doing so.

The RBI had actually prepared the ground for the interest rate hikes. All its recent policy statements have specifically taken note of the risks to the global economy. Persistently high and sticky oil prices have been a source of constant worry because of their impact as much on the current account of the balance of payments as on the domestic price situation, when the "full pass though" effects on retail consumers is felt. The acute problem of global imbalances and the savings of Asian countries feeding the current account deficit has been highlighted in the past. Many see in the present volatility in the stock and forex markets the beginning of a correction of the imbalances. Under such circumstances, inflation concerns become all the more acute. In its annual policy statement, the RBI had warned against asset price inflation and the explosive growth in retail loans under certain categories. It had then tightened regulatory norms over these and made retail loans more expensive. The latest interest rate hike is a follow up on those warnings. In a broader sense, the RBI's action should help in bringing domestic interest rates, both on deposits and advances, up to realistic levels.